Curious About Buy-and-Hold Real Estate Investing?
You might have seen some of our fix-and-flip success stories, but did you know that we also provide funding for buy-and-hold real estate investors? The buy-and-hold strategy is different than the more popular “quicker is better” house flipping method in many ways. Buy-and-hold investing has greater potential to generate long-term, passive income and therefore requires a different outlook on the project itself. Buy-and-hold is the way to go if you’re looking to build a real estate investment empire over time.
From Newlyweds to Landlords
One of our very successful borrowers, Richard, is a buy-and-hold real estate investor in Delaware County, Pennsylvania. About three years ago, with the encouragement of several other entrepreneurs in his family including his wife, he decided to leave his full time job and start a real estate investment company. Bonus points to him for making this decision on his honeymoon with his new wife’s support!
This leap was not a foolish one though. Before making the jump, Richard took the time to carefully develop his business plans. His planning included accounting for acquisition costs, devising a time-to-payoff formula, estimating maintenance fees, and researching lenders and refinancing options. With a fool-proof plan in place and several check-ins with a trusted mentor, Richard made the leap to full time real estate investor.
Richard’s Real Estate Investing Plan
The two major investment rules that Richard developed were that (A) the distressed properties had to increase enough in value from his improvements to make it possible to pull his money out when refinancing, and (B) the property should generate enough rental income to be paid-off within a 7 year period. With these qualifications in mind, he identified an area he knew had the inventory of qualified distressed homes and rental demand to fill them with tenants. He set a goal to bring his empire to 50 “doors” by 2022.
”Doors” is common jargon used by buy-and-hold real estate investors to mean the total number of rentable units owned by the company. It combines single family homes, row-homes, and apartment units into one, empire-spanning metric.
By focusing his attention on one area that he knew well, Richard cut down on the amount of market research he needs to do for each property acquisition. He knows the area’s situation from his original research, but he also has a great feel for the local rental market since he’s already managing several comparable properties in his portfolio. By sticking to one reliable area, Richard is building off his previous success to keep his empire alive and growing.
Focus on Renters
Richard knows that making a property desirable as a rental is key to his success. He can beat out competitors in the market with new fixtures, new appliances, fresh paint, and modern countertops. Because he and his team did the improvements themselves, he also knows the property will require less maintenance in the years to come when he is the property manager.
In striking contrast to most fix-and-flippers, Richard prefers a “lipstick” rehab as long as the purchase price is low. If you remember that the goal is to have rentable, income-producing property at minimum cost and risk, it makes a lot of sense to target smaller rehab projects that can be quickly turned into more rentable “doors.” This strategy requires a prioritization of [rental income/acquisition] over [ARV].
Once the home is rehabbed, Richard refinances his loans from a private lender to longer term loan with lower interest at a traditional bank. Because investment property loans are a little less predictable than typical homeowner loans, Richard leverages the relationships that brokers have to find a great deal for the refinance product. According to Richard, “[i]t’s worth their fees to access the relationships these brokers have with lenders.”
Before and After's from a Recent Project:
Richard's Advice for New Investors
Richard has some advice for newer investors looking to get started:
- Take the time really understand the market and how your numbers will play out over time.
- Explore brokers and financing options before you need to so that you have relationships in place and aren’t ever stuck.
- Burn the boats - within reason. Put yourself in a position where you have to be successful so that you keep the motivation on the project and it’s profitability.
- Find houses to flip by pre-empting realtors. Look for loss of employment, hard times situations where you can help with a quick offer.